Mortgage Rates Spike, but Could Be on the Decline

There are lots of unusual effectors in the market driving today's mortgage rates. Most of them are driven by unique forces of intervention, which make forecasting mortgage rates incredibly complex. However, it is possible to take a survey of these influencers and navigate to a reasonable trajectory.

Investors, and now the US government, are incredibly focused on the thawing of the credit market. One important king pin in the economic recovery and the great credit thaw are mortgages.

Unfortunately, thus far this has been the most challenging portion of the equation. We see LIBOR (London Interbank Offered Rate index) on the decline, indicating interbank lending is beginning to flow again. On the other hand, lending to homeowners and new home buyers has been firmly locked. However, there are some signs a swing maybe coming.

Bank Mortgage Rate Surveys

Many of these early indicators are showing up in lender rate surveys and mortgage securities. Our own survey of bank lending rates showed a notable 11 basis point (a basis point is 1/100th of a percentage) drop on the 30 year fixed mortgage rate. This rate is still reflecting higher than the immediate rate drops seen after the take over of Fannie Mae and Freddie Mac.

The Mortgage Bankers Association has confirmed a similar surveyed bank rate drop, reporting a nearly 20 basis point drop over the previous week. Leaving a consistent 30 year fixed rate mortgage very close to 6 percent.

MBS to Treasury Spreads

Another strong indicator of rates are movements in the mortgage-backed securities (MBS) market. This is the underlying mover of daily mortgage rates. However, if you are looking to spot trends or forecast you need to look at spreads between US treasuries and MBS, alternative risks.

US treasuries, backed by the full faith and credit of the US government have very little risk to the investor and therefore tend to trade with little or no risk premium. Consequently, when the spread is small between US treasuries and MBS it indicates investors have strong confidence in the repayment of mortgages, causing rates to decline.

The current MBS market is showing that spread significantly decline, 20-30 basis points by most indices. However, the overall spread is at 121 basis points, in stark contrast to 50 basis points two years ago, according to the Merrill Lynch US MBS Index.

Intervention Causes Surprises

Traditional market indicators would all point to downward pressure on mortgage rates, and that is certainly the prime objective of the US government. Yet, some actions have unintended consequences. For example, last week's historic spike in mortgage rates was the unintended market consequence of the US government getting involved in directly lending to the commercial entities.

The launch of the Commercial Paper Funding Facility, adminstered by PIMCO sent MBS risk premiums soaring as investor money flowed out of the MBS and treasuries markets to higher yielding commercial debt, which now had essentially the same guarantees as US treasuries. Meanwhile, the mortgage debt bailouts have not kicked in yet leaving MBS much risker for a lower yield.

Mortgage Rates Need Accelerated Government Action

To see mortgage rates firmly on the decline the US government needs to accelerate its promised buying of illiquid mortgage assets. Promised early and cited as one of the largest impediments to the credit lock, little buying has occurred. This leaves mortgage rates erratic and the credit noose continuing to tighten on the consumer.

Meanwhile, loan officers are reporting mortgage affordability is heading in the wrong direction. "Other aspects of mortgage pricing, like private mortgage insurance is climbing faster than any foreseeable declines in mortgage rates," explains Dan Green a loan officer with Mobium Mortgage, a 50 state lender.

All the pieces and tools are in place, in the words and assurances of the US Treasury. Unfortunately, the pace of implementation may be delaying relief in mortgage affordability in the short-term and unintended mortgage rate bounces could harm the mortgagee trying to time the market.